Why is your credit rating important?

By the resi financial blog team, 15 August 2014

Credit ratings

Borrowers seeking a home loan need to make sure their credit rating is as positive as possible to avoid being refused by a lender, or charged a higher interest rate.

Lenders rely heavily on this credit rating to determine a borrower’s risk profile. The rating is found in a credit report provided by credit reporting agencies to lenders. If it shows a history of missed payments or bad debts, then the borrower may be refused the loan or asked to pay higher rates of interest.

The type of information credit reports contain include personal details such as name, address and current employer, data about any credit accounts or loans, late payments, bankruptcies, and any recent inquiries made about applying for credit the payment history is also listed.

If a borrower has any accounts that are more than 60 days in arrears, they are listed as a default on the credit file. These defaults remain listed for five years, and individuals with a high number are considered risky.

So how do you make sure you are attractive to potential lenders?

Making sure you pay your bills on time is key. Payments that are even 30 days late can adversely affect a credit score. This includes bills such as phone and electricity. One way to do this is to set up direct debits for all your bills so they are paid automatically.

If you have a revolving debt it may not be in your interest to pay it off completely. Once it’s gone it’s no longer in your report and you want your report to show how you manage debt. Remember though, if you keep the revolving debt, don’t fall behind in your payments.

And don’t forget, if you are having problems meeting any repayments, ask for an extension or negotiate new payment terms.

Categories: credit rating, home loans